Abstract
Our paper investigates whether there is evidence of an Equity Premium Puzzle (EPP) in Brazil, applying two different methodologies. The EPP was identified by Mehra and Prescott (1985) since the Consumption Capital Asset Pricing Model (CCAPM), when calibrated with reasonable preference parameters, could not explain high historical average risk premiums in the United States. In our first approach, we consider Mehra's (2003) model and calibrate the coefficient of risk aversion, using 1995:2-2012:1 quarterly data. The Ibovespa index was used as a measure of the market return, whereas the risk-free rate was proxied by the Selic interbank rate and by the savings account rate. In our second approach, we propose a new method to test the puzzle. We jointly estimate, via generalized method of moments, the parameters of interest using a moment condition that has not been previously explored, as far as we are aware of. The two approaches produced a high risk aversion coefficient, however the second approach indicated that we cannot reject the hypothesis of the risk aversion coefficient being statistically equal to zero. A possible explanation for this result might be that in Brazil the equity premium is not statistically different from zero. Therefore there is no evidence of EPP in Brazil for the studied period.
Highlights
The intertemporal choice of households and firms concerning how to allocate their resources is of central interest to economics and finance
Its result suggests that the Consumption Capital Asset Pricing Model (CCAPM), when calibrated with reasonable preference parameters, cannot explain the high historical average risk premiums in the U.S In other words, a high risk aversion is needed in order to match the theoretical moment from an Arrow-Debreu asset pricing model and the empirical moment
We show later that the hypothesis adopted by Mehra (2003) allows the joint estimation of the two parameters that define the theoretical risk premium: risk aversion and the variance of the consumption growth rate
Summary
The intertemporal choice of households and firms concerning how to allocate their resources is of central interest to economics and finance. This decision depends on investment opportunities available and especially on their returns. It is reasonable to think that there should be a premium, given the risk of equity. This study became well known for having identified the Equity Premium Puzzle (EPP) for the American economy. Its result suggests that the Consumption Capital Asset Pricing Model (CCAPM), when calibrated with reasonable preference parameters, cannot explain the high historical average risk premiums in the U.S In other words, a high risk aversion is needed in order to match the theoretical moment from an Arrow-Debreu asset pricing model and the empirical moment
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
